Edwards Wildman Client Advisory - The Court of Appeal says that contractual terms limiting or excluding recoverable damages do not preclude applicants for interim injunctive relief from arguing that damages are not an adequate remedy


    The Court of Appeal has, in the case of AB and CD [2014] EWCA Civ 229, recently had an opportunity to consider and address the proper approach to the grant of an interim injunction, in particular in relation to a claim for an alleged breach of contract where the contract contained a provision which sought to limit the recoverable damages to a level below what might otherwise have been awarded as a matter of general law. 


    The issue, essentially, was whether a party could obtain injunctive relief restraining a potential breach of contract where the contract specifically excluded or limited the amount of recoverable damages for that breach.  The Court of Appeal confirmed that “where a party to a contract stipulates that if he breaches his obligations his liability will be limited or the damages he must pay will be capped, that is a circumstance which in justice tends to favour the grant of an injunction to prohibit the breach in the first place”.


    The facts of the case were quite straight-forward.  The parties had entered into a licence agreement, permitting the Appellant to market the Respondent’s internet-based sales platform (referred to as the “eMarketplace”) in the Middle East.  The Respondent sought to terminate the licence with effect from the end of 2013.  The Appellant resisted this termination on the basis of the terms of the licence agreement (which was governed by English law and contained an arbitration agreement).  In addition to commencing arbitration proceedings, in December 2013 the Appellant also brought a claim in the Queen’s Bench Division for an interim injunction under section 44 of the Arbitration Act 1996 “requiring the [Respondent] to continue in all respects to perform its obligations under the Licensing Agreement…and restraining the [Respondent] from terminating or suspending the…Agreement pending the Award in the arbitration…”.


    At first instance, Stuart-Smith J declined the Appellant’s application for relief.  He applied the facts to the key issues to be considered when determining whether an interim application should be granted, which stem from the well-known American Cyanamid principles:


    (1) Is there a serious issue to be tried?


    (2) Would the claimant be adequately compensated by an award of damages at trial?


    (3) Does granting an injunction favour the balance of convenience?


    (4) Where there is an even balance between the parties’ cases, the court should favour the status quo.


    Although Stuart-Smith J found that there was a serious issue to be tried and that the balance of convenience would have favoured the grant of an injunction, he concluded after considering the relevant authorities that the Appellant (the Applicant at first instance) had an adequate remedy in damages and therefore the application for an interim injunction should be refused.


    The decision hinged on clause 11.4 of the licence agreement which comprised two elements:


    • First, liability was excluded for a number of types of loss, including “lost profits”, and heads of damage.  In the Court of Appeal, Lord Justice Underhill stated that the various terms used covered a wide range of loss and that “it is not altogether easy to conceive of circumstances in which either party could recover substantial damages for a breach of the Agreement”.
    • Secondly, there was a cap on such damages as might nevertheless be recoverable.  It is estimated that the cap in the circumstances of the present case would be in the region of £17,000.

    In the Court of Appeal, referring to the binding authority of Bath and North East Somerset District Council v Mowlem plc [2004] BLR 153, Lord Justice Underhill found in favour of the Appellant and held that the injunction should be granted.  Fundamentally, he said, the “primary obligation of a party is to perform the contract.  The requirement to pay damages in the event of a breach is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligationThe rule – if “rule” is the right word – that an injunction should not be granted where damages would be an adequate remedy should be applied in a way which reflects the substantial justice of the situation”.


    The Respondents argued that it could not be right that anyone faced with a possible breach of contract could rely on an exclusion or limitation clause to claim that damages would not be sufficient, effectively leaving an interim injunction as the only option.  Lord Justice Underhill countered this by explaining that a claimant will still have to show that if the threatened breach occurs there is (at least) a substantial risk that he will suffer loss that would otherwise be recoverable but for which he will (or may) be prevented from recovering in full, or at all, by the provision in question.  If the claimant can prove this, he will likely have done enough to demonstrate that damages alone will not be sufficient compensation, and the defendant cannot simply rely on the fact the clause was agreed between the parties.  Lord Justice Underhill concluded that of course it is still a matter for the court’s discretion when deciding whether to grant injunctions.


    All three judges in the Court of Appeal agreed that injunctive relief is a remedy available to the court where it is in the interests of justice that obligations should continue to be binding on the parties. 


    The emphasis on the concept of “justice” is interesting as it reinforces the discretionary aspect of injunctive relief, highlighting how judges must give consideration to all the facts of a particular case and the overriding concept of “substantial justice”.  It also indicates the Courts will not slavishly follow the “rule” of whether damages are an adequate remedy but instead reframed the question in cases such as these to whether it would be just “in all the circumstances that a [claimant] be confined to his remedy in damages [as provided in the contract]”.


    This case might result in some novel clauses being drafted into future contracts along the lines that the parties agree that any provision for liquidated damages (or capped or excluded damages) is understood and agreed by the parties to be an adequate remedy in the event of any breach of contract by the counterpart.  It will be interesting to see how the Courts consider such clauses in the future and whether they will still take each case on its own facts and exercise discretion on interim injunction applications notwithstanding the terms and conditions agreed to by both parties.

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